Saturday, April 23, 2011

Studied ambiguity in tax reform negotiations

There is a good deal of confusion and obfuscation on both sides of the debate over tax reform  -- at least, over the kind of centrist tax reform outlined in the Bowles-Simpson plan and being negotiated by the Senate Gang of Six.
The basic premise is to vastly reduce targeted tax breaks both personal and corporate while simultaneously reducing marginal tax rates.  The battlegrounds are presumably how much to reduce which tax breaks and how much of the resulting revenue to devote to lowering rates as opposed to deficit reduction.

For Republicans, the taboo is to "raise taxes."  Their potential cover is to lower marginal rates while raising the government's net income, most easily measured as a percent of GDP.  That's the point of obfuscation -- will they or won't they?  Can Coburn/Chambliss/Crapo sell Republicans on raising more revenue in any given year than the current tax code would bring in? Will they try?

For Democrats, the loaded phrase is to raise taxes on the wealthy, which they are sworn to do.  The problem is that that goal is generally equated with (or let's say mainly symbolized by) letting the Bush cut in the marginal rate for the wealthiest 2% expire. Comprehensive tax reform of the sort envisioned by Bowles-Simpson would render debate over the Bush tax cuts moot -- all marginal rates would be lowered (while in Bowles-Simpson capital gains would be taxed at ordinary income rates -- a major hike on the rich). Can Obama and the Democratic leadership in Congress get behind a plan that will reduce the top marginal income tax rate on the wealthy? Will they try?
Principals on both sides are threading rhetorical needles. In a radio interview on Thursday, Tom Coburn said that ""There's no plan to have a significant tax hike on anyone,"and that the Gang of Six was working on eliminating tax credits while lowering marginal rates.  He added: "Will some people pay increased taxes? I'm sure they will."  Which begs the question: which people, how much more, and will the government end up with more revenue under the new code than it would under the current one? (Leaving aside the alleged effect of any tax code change on GDP.)

Obama, on the other hand, has left a fundamental ambiguity in the tax reform outline posted on, and in his presentation of the administration's plan.  The plan claims $1 trillion in additional revenue raised from tax reform over twelve years. Yet it books approximately that amount simply be ending the Bush tax cuts on the top 2% of earners  while also stating, "The President supports the Fiscal Commission’s goal of reducing tax expenditures enough to both lower rates and lower the deficit." How the goals of ending the Bush tax cuts and booking revenue gain from that while fundamentally reforming the tax code would be conflated, and how the savings from the two paths would combine, is left unexplained.

Greg Sargent, an eloquent advocate for progressive policies, seems to me to have confused the terms of debate today. Eyeballing the Gang of Six negotiations, he asks, Will Gang of Six Dems cave on taxes and Social Security?  Let's leave aside SS for the present. On taxes, what's got him nervous is a comment by Coburn: 

"“There’s no plan to have a significant tax hike on anyone,” Coburn said, adding that none of the Republicans in the talks “will embrace tax hikes.”
Now, Sargent does know how to read this riddle:
My understanding is that the talks are zeroing in on a large increase of revenues — but not by raising tax rates. Rather, the compromise would center on eliminating tax earmarks and other deductions as a way to bring in more in taxes.
But he seems to think that Democrats have given something away by engaging the argument on these terms:
What are Dems prepared to trade away for increased revenues that don’t even include tax hikes?

"That don't even include tax hikes"?  As I understand the debate, raising marginal rates is not on the table. The question, again, is how much net extra revenue generated by the reduction of loopholes will be kept by the government, and how much will be given back by lowering rates. Also, since loopholes will not be eliminated entirely -- Bowles-Simpson proposes preserving in some form the earned income tax credit, the mortgage deduction, charitable giving, employer-provided health insurance, and retirement savings -- to what extent will the burden of reducing them fall on "the wealthy", however defined?

If a comprehensive budget deal is floated, a lot of people are going to have some 'splainin' to do.

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